NORTH KOREA - 55

NORTH KOREA
THE POLITICAL ECONOMY OF TRUSTPOLITIK: WHAT IS
AHEAD FOR NORTH-SOUTH TRADE AND INVESTMENT?
By Stephan Haggard

Abstract
Park Geun-hyes Trustpolitik envisioned incremental, step-by-step exchanges, including economic ones, that would build
trust. The strategy was disrupted by North Korean provocations during the frst half of 2013 and had to be recalibrated.
However, trade and investment have been limited not only by direct political constraints, but by the inherent risks South
Korean frms face in operating in North Korea. The future of Trustpolitik therefore depends on two strategic questions for
the South: the nature of North-South economic engagement it seeks; and the question of reciprocity, or what it expects in
return. Given that large-scale investment projects are unlikely, two strategies are possible: an expansion of the zone model,
exemplifed by Kaesong, or a strategy of placing greater emphasis on purely commercial transactions with the North.
56 - KOREAS ECONOMY 2013
During the presidential election campaign of 2012, Park
Geun-hye appealed to centrist voters by developing a new
approach toward North Korea. The concept of Trustpolitik,
outlined in some detail in campaign speeches and a widely-
read Foreign Affairs article,
1
sought to fnd middle ground
between the open-ended engagement of the Kim Dae-jung
and Roh Moo-hyun years and the more confrontational stance
of the Lee Myung-bak presidency. Trustpolitik envisioned a
set of small reciprocal steps that would gradually produce
trust and provide the basis for a more wide-ranging political
as well as economic relationship.
As with her predecessors, the Park administration quickly
learned that the best laid plans ultimately depend on the
behavior of North Korea. In quick succession in late-2012
and early 2013, candidate, president-elect, then president
Park faced a successful North Korean satellite launch, a
third nuclear test, and a particularly vituperative diplomatic
and military response to the international condemnation that
followed. In April, North Korea initiated a stand-off over
the Kaesong Industrial Complex (KIC) by pulling the entire
North Korean workforce out of the zone; it would take over
fve months for it to reopen.
In the wake of these challenges, the Park administration had
to calibrate its conception of Trustpolitik, and drifted toward
conditional engagement that looked to critics quite similar to
the Lee Myung Bak approach. However, this assessment is
not entirely accurate. Although Park Geun-hye threatened to
close down Kaesong, she ultimately negotiated its reopening
and endorsed ambitious plans to internationalize the zone
by attracting foreign investment from beyond South Korea.
She undertook modest humanitarian gestures and signaled
that the post-Cheonan sanctions might be modifed at the
margins by allowing South Korean investment in Rason.
This overview of Trustpolitik begins with a brief portrait of
North-South economic relations up to this point. The bilateral
relationship has always combined three very different
types of economic ties: purely commercial oneswhich
constitute a minority of trade and investmentthe quasi-
commercial relationships of Kaesong, and the aid component
of the relationship. The mix of these forms of engagement
correlates closely with politics in the South. A central issue
looking forward is the mix between these different modalities
of engagement and particularly their commercial component.
The second section reports on the results of a survey of South
Korean frms doing business in North Korea and compares it
with a similar survey of Chinese frms. South Korean frms
operating in North Korea tend to be small and dependent on
government support. With the exception of Hyundai, chaebols
have shunned the country, and Kaesong has effectively
become a kind of industrial policy for labor-intensive frms
facing competitive pressures at home. The counterparties of
South Koreanand Chinesetrade and investment have
largely been state-owned entities in the North, calling into
question some of the socializing effects that engagement
might have. Yet the zone strategy has been one path through
which a number of East Asian countries opened up to foreign
investment, and it is likely to be the centerpiece of any
deepening of the North-South economic relationship.
The fnal section tracks the diffcult course of Trustpolitik
during the frst year of the Park administration and the
prospects for it in the remainder of her administration.
North Korea does not appear to be particularly anxious to
expand the presence of foreign frms outside of tightly-
controlled enclaves. Similarly, South Korean frmsoutside
of small ones engaged in the processing-on-commission and
commercial tradedo not yet see particular advantages from
entering North Korea outside of the zones. These constraints
place limits on the relationship, quite apart from political
developments between North and South.
Nonetheless, the fundamental problems facing Trustpolitik
are political, and center on the question of reciprocity.
During the current charm offensive, North Korea has shown
surprising fexibility on family reunions even while joint
US-ROK exercises were taking place. The prospects for
deeper economic integration are bounded not only by North
Koreas interest in economic reform and opening but by their
willingness to moderate their foreign policy behavior. The
course of Trustpolitik in the medium-run is likely to focus on
small-scale humanitarian assistance, Kaesong and a possible
extension of the zone model to South Korean involvement
in Rason. Over the longer-run, South Korea can encourage
a more commercial approach on the part of the North by
playing a more arms-length role toward North-South trade
and investment than in the politicized Kaesong model.
Patterns of Trade
It is important to start with some understanding of the history
of North-South economic relations, as they have been deeply
politicized from the outset. Successive governments have had
to make decisions about the balance between more purely
commercial relations, joint projects that involve government
support and guarantees, such as Kaesong, and outright aid.
The Trustpolitik concept faces similar choices.
The opening of North-South trade is often associated with
the Kim Dae-jung era and the summit of 2000, but it in fact
had its origins in Roh Tae-woos Nordpolitik and concrete
policy measures permitting North-South trade taken in 1988.
Initially, chaebols took the lead, following Hyundai chairman
Chung Joo-youngs efforts in 1989 to tie up a number of
NORTH KOREA - 57
lucrative investment opportunities, including with respect
to Mt. Kumgang. Although other chaebols entered into
preliminary discussions of ambitious projects, early trade was
dominated by small traders and a handful of processing-on-
commission ventures around Pyongyang.
In 1990a full decade prior to the Kim-Kim summitSouth
Korea passed the Intra-Korean Exchanges and Cooperation
Act and the Intra-Korean Cooperation Fund Act, the former
establishing the legal basis for trade, the latter creating an
important tool for direct assistance to the North and to frms
and NGOs engaged with the DPRK. This phase of opening hit
a highpoint with the signing of the so-called Basic Agreement
in 1991, which had a substantial economic component.
The onset of the second nuclear crisis and the ambivalence
of the Kim Young-sam administration led to a period of drift
in commercial relations. Small-scale ventures continued,
but none of the large-scale projects came to fruition.
Rather, North-South economic exchange was dominated
by the light-water reactor project, a product of the Agreed
Framework settling the frst nuclear crisis. Managed by the
Korean Energy Development Organization (KEDO), the
project constituted a very large aid commitment funded
largely by the Korean and Japanese governments. It was
subsequently abandonedat great costfollowing the
onset of the second nuclear crisis.
The Kim Dae-jung summit opened up the decade-long era
of engagement, the results of which can be seen most clearly
in Figure 1. This fgure focuses on South Korean exports
to North Korea dividing them into four categories that
refect increasing levels of government involvement. The
general trade and processing-on-commission trade are the
most commercial forms of engagement, even if they involve
offcial counterparties. South Korea ran a defcit on general
trade, which was dominated by North Korean exports to
small South Korean importers and a broadly balanced
processing-on-commission account, mostly in the textile-
apparel sector.
The most signifcant developments of the Kim Dae-jung and
Roh Moo-hyun era, however, were two. The frst was the
beginning of large-scale food and fertilizer assistance, the
overwhelming majority of the non-commercial trade.
2
The
second, following the opening of the Mt. Kumgang tourist area
and the Kaesong Industrial Complex, was the trade associated
with economic cooperation projects. In sum, trade grew
Figure 1 South Korea to North Korea Total Exports by Component (1989 to November 2013)
Note: *The year 2013 only includes trade values through November.
Source: MOU (Monthly Report Inter-Korean Exchanges & Cooperation)
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
*
2
0
1
3
1,200
1,000
800
600
400
200
0
General Trade
Processing-on-Commission
Economic Cooperation (Mt. Geumgang Tourism,
Gaesong, Other/Light Industry Cooperation)
Non-Commercial Trade (Govt and Civilian Aid /
Social & Cultural Cooperation / LWR /Heavy Oil, etc.)
Total Exports
U
S
$

m
i
l
l
i
o
n
58 - KOREAS ECONOMY 2013
during this period but it was not purely commercial in nature;
indeed, aid dominated even the cooperation projects
through much of the engagement era.
With the election of Lee Myung-bak, aid fell in two steps.
From the outset, the administration reversed the commitment
to large-scale and ongoing humanitarian assistance, arguing
that it should be offered only in response to a clearly defned
need. Moreover, other forms of development assistance
should be conditional: they should follow, rather than lead,
an improvement in the overall political relationship including
progress on denuclearization. Following the sinking of the
Cheonan in March 2010, the government announced the so-
called May 24 measures that prohibited contact with North
Koreans and blocked new investment in the North. As can be
seen in Figure 1, the general and processing-on-commission
trade operating outside of Kaesong dropped to virtually
nothing, limited to a handful of frms operating with Chinese
rather than North Korean counterparties. Kaesong survived
and came to dominate bilateral exchanges prior to the sharp
fall in trade associated with the shutdown of Kaesong in 2013.
These shifting approaches to engagement had an effect
not only on North-South economic ties, but on the overall
pattern of North Koreas trade. These are shown in Figure
2 which uses Korea Trade-Investment Promotion Agency
(KOTRA) data to show North Koreas total trade with the
fve interlocutors in the Six Party Talksthe U.S., China,
Japan, South Korea and Russiafor 2000 through 2011.
3

Three developments are noteworthy. Prior to the onset of
the second nuclear crisis in 2002, Japan had maintained
quite extensive trade relations with North Korea despite the
absence of formal diplomatic relations. Japan was the source
of large remittances from the Korean-Japanese community
and it responded with substantial aid following the onset of
the famine. After 2002, Japanese policy gradually drifted
toward a near-complete embargo.
Second, South Koreas share of North Koreas total trade rose
after 2004 as a result of both aid and the growth of Kaesong
trade. However, South Koreas share fell during the Lee
Myung-bak presidency. The result of Chinas rapid growth,
its proximity to North Korea, and the decline in the shares of
Japan and South Korea was a dramatic increase in Chinas
role in North Koreas foreign economic relations. Although
the 70 percent estimate for 2011 is high, and some of the
trade with Japan and South Korea has simply been re-routed
through China, it is clear that North Korea is increasingly
dependent on China.
Three points emerge from this short history. First, any
strategy of engagement must consider what type of economic
80
70
60
50
40
30
20
10
0
China (Total Trade)
US (Total Trade)
%

o
f

D
P
R
K

t
o
t
a
l

t
r
a
d
e
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
S Korea (Total Trade)
Japan (Total Trade)
Russia (Total Trade)
UN Resolution 1718 UN Resolution 1874
Figure 2 Shares of DPRKs Total Trade (%)
Source: KOTRA (Korea Trade-Investment Promotion Agency, http://www.kotra.go.kr
NORTH KOREA - 59
relations it seeks to promote with the North, ranging from
more commercial ties, through cooperation projects to aid.
Second, any strategy must decide what it ultimately seeks
from North Korea in return for any assistance on offer; we
return to this issue below. Finally, the Trustpolitik approach
must assess the risk of not engaging, including with respect to
Chinas growing infuence in the North.
Evidence from Firm-Level Surveys
It is often assumed that the main barriers to deeper North-
South integration are political, and this is clearly true as
we have seen. Yet we also need to understand how those
political constraints operate at the level of the frm. Such
insight can be gleaned from a survey of 200 South Korean
frms doing business in North Korea that was conducted
during November 2009 and March 2010, and comparisons
with a similar survey of Chinese frms conducted in 2007.
4

The design of the studies using these surveys included
a comparison group of frms not doing business in North
Korea so that we could compare some of the distinctive
features of the frms doing business in the North.
The South Korean frms doing business in North Korea were
engaged in importing, exporting, and investment through
arms-length transactions, processing-on-commission trade,
or the Kaesong Industrial Complex. In contrast to the Chinese
sample, however, nearly all of the frms in the sample (94
percent) were involved in importing, either directly from
North Korean counterparties (59 percent) or via some kind
of processing relationship (33 percent). By contrast, less than
half the sample45 percentwere involved in exporting
and the bulk of the exporting frms operated in the context of
processing relationships (33 percent); only 12 percent sold to
North Korean counterparties outside of such relationships. Of
those frms that invested in North Korea, the large majority
were in Kaesong.
These relationships alone suggest the perception of
signifcant risk: importsfor example of undifferentiated
raw materials or marine productsare easily settled in
advance or on delivery. But exports and investment involve
payment and expropriation risk. Firms hedge such risks
through POC arrangements or through location in Kaesong.
When we compared the sample of frms doing business in
North Korea with those that didnt, we found that status as
a small- or medium-sized enterprise (SME) was positively
related to entry, confrming our observation that the larger
chaebol groups have generally shunned North Korea. The
most interesting fnding, however, centered on the role of
public policy. Access to public support, including in the
form of lending, was a signifcant determinant of entry. Not
only were frms doing business with North Korea small, but
they relied on state support.
In sum, it appears that two types of South Korean frms have
engaged in trade and investment with the North to date. Those
operating outside the zone are more likely to be engaged
in trade, less likely to be involved in manufacturing and
rely less on credit. Those opting for Kaesong, by contrast,
were almost all involved in manufacturing, were reliant on
fnancing and actually had more negative assessments of the
operating environment of North Korea than those operating
outside the zone. These fndings are important because they
speak to the perceived risks of operating in North Korea.
From the early opening of economic relations in the late
1980s through the imposition of sanctions in 2010, frms
were free to take the risk of trading and investment in the
North. But as both the trade data and our surveys show, risks
are high and frms adjust their way of doing business with
North Korea accordingly.
This pattern is very different than China-DPRK interactions.
The Chinese frms engaging in cross-border trade are largely
private, do not have substantial support from the Chinese
government, if any, and have a limited belief in the ability of
their government to protect them in the face of disputes. As a
result, these frms are more likely to operate on commercial
terms and exit if unproftable. Contrary to one popular view,
Beijing does not appear to be directing this engagement or
using it to subsidize North Korea. The Chinese government
seems to be sending a strong signal both to North Korea
and to Chinese frms that it will not intervene to subsidize
risk. However, this may change going forward as both the
Chinese government and frms tire of the diffculty of doing
business in the country. China is also exploring its own
enclave options, for example in the development of the
Rason and the Hwanggumpyong and Wihwa Island zones;
we return to this zone strategy in more detail below.
First, any strategy of engagement
must consider what type of economic
relations it seeks to promote with the
North, ranging from more commercial
ties, through cooperation projects
to aid.
60 - KOREAS ECONOMY 2013
The Twists and Turns of Trustpolitik
In her widely-read Foreign Affairs piece, Park Geun-hye
sought to move the newly-named Saenuri party back to
the political center on North Korean issues. As with Kim
Dae-jungs sunshine policy, Park made clear that a new
government would not tolerate provocation nor close its eyes
to the nuclear issue. But while arguing that engagement under
Kim Dae-jung and Roh Moo-hyun didnt work, she argued
that the governments in Seoul that have placed a greater
emphasis on pressuring North Korea have not been able to
infuence its behavior in a meaningful way, either.
A key feature of the Trustpolitik approach was economic. In an
important campaign speech in November 2012, Park drew on
a variety of past initiatives to present a range of opportunities
to the North. At the broadest level, these included initiatives
such as a Northeast Asian Peace and Cooperation Initiative
modeled on the Organization for Security and Cooperation
in Europe (OSCE or Helsinki) process, a Eurasian or Silk
Road initiative that would reconnect North-South rail links,
and multilateral economic support for the North. More modest
proposals included a resumption of humanitarian assistance,
the creation of North-South Exchange and Cooperation
Offces in Seoul and Pyongyang, and more North-South
special economic zones.
The fundamental dilemma facing the Park administration
has been the question of reciprocity. The initial strategy was
to start with very limited exchanges that could be tightly
calibrated, with the larger projects as longer-run inducements.
For example, appropriate humanitarian assistance might be
offered in the context of a resumption of family visits, which
the South always defned as an humanitarian issue. With
progress on these issues, more ambitious ones could follow.
For example, progress on the nuclear issue could open the
door to the large-scale Vision Projects consisting largely of
investment in much-needed infrastructure.
The problem that the policy faced from the outset, however,
was what to do in the face of North Korean failure to
reciprocate or even manifest provocations? Would it be
politically possible to sustain the Trustpolitik approach in
the face of the tensions of the frst part of the year? Would
the concept of reciprocity need to be abandoned? In fact,
the approach was modifed to allow for unrequited steps,
particularly with respect to humanitarian assistance. Even
as relations were starting to unravel in March 2013, the
Park administration authorized modest humanitarian aid.
But the military provocations of the post-test period and
the North Korean decision to pull workers out of Kaesong
tested the limits of unrequited measures, and forced a
rethink of the strategy.
Even the Lee Myung-bak administration had kept Kaesong
open. As the negotiations over the industrial park entered their
endgame, Park Geun-hye showed unusual resolve, backed
by overwhelming public support. She signaled that in the
absence of a more forthcoming and institutionalized approach
to the zoneincluding stronger guarantees against further
political manipulationshe would draw on an insurance fund
against political risk to pay out frms in the zone and shut it
down completely. This prospect proved too much even for the
hardliners in Pyongyang. By August there were already signs
of a larger political thaw and a settlement was reached that
ultimately allowed the zone to reopen in September.
In October, the Ministry of Unifcation began circulating a
pamphlet that provided a restatement of the Trustpolitik
concept. Although the document made reference to the
signifcance of making progress on the nuclear issue, that
linkage would not be tight; it would not be feasible, the
pamphlet noted, to relate every inter-Korean issue to the
North Korean nuclear program. An important signal buried
in the document was also the willingness to abide by inter-
Korean agreements, presumably including the 2000 and 2007
summit documents that the North has always championed
as the keystone of the North-South relationship. The 2007
document in particular contained a variety of quite ambitious
joint development projects.
The core approach, however, remained the one outlined prior
to Parks assumption of the presidency: to begin with small
steps that would hopefully build into an overall improvement
in the political climate. Humanitarian assistance and the
reopening of Kaesong were followed by on on-again, off-
again process with respect to family reunions, which were
ultimately held in February 2014. The Park government also
subtly relaxed the May 24 measures following the Park-Putin
summit in November 2013 to permit indirect investment in
the rail project connecting Rason to Russia.
The Trustpolitik approach now faces two central challenges.
The frst is the diffcult choice the South has to make between
different modalities of economic exchange with the North.
At one end of the spectrum of choice is a more hands-off,
commercial approach that permits trade and investment but
leaves frms to make their own economic decisions. A similar
approach could be taken with respect to NGOs: allow them
to function as they wish, but without state support. This
approach would require the politically diffcult move of
lifting the May 24 sanctions, but has the important advantage
of forcing North Korea to make choices about policy toward
trade and investment; to use Kim Dae-jungs felicitous phrase,
it separates economic and politics. It also has the advantage
that investments made will refect North Koreas comparative
advantage rather than a more purely political logic.
NORTH KOREA - 61
The drawback is that Pyongyang is unlikely to see such a
purely commercial approach as yielding adequate gains to
the regime. Indeed, it is unlikely to see such a gesture as
much of a conc ession at all, despite the regimes continual
complaints about sanctions. Rather, Pyongyang will seek its
own form of political and economic linkage: tying economic
progress to a political agenda, involving the South Korean
government in joint projects such as Kaesong and demanding
outright assistance.
The second modality of economic engagement might be
called the zone model. Given that frms are hesitant to
invest in the absence of infrastructure and guarantees, the
only way to get trade and investment going is to effectively
subsidize it and insure against political risk. The bet of this
approach is that the zones will be the leading edge of a more
gradual reform not only of the external sector but of the
domestic economy as well. In both export-oriented capitalist
countries, including South Korea, as well as socialist regimes
such as China and Vietnam, export-processing zones became
an important way station on the road to greater economic
openness and integration.
Yet this may not be the case in North Korea, at least in the
short run; rather, the quest for foreign investment may be a
substitute rather than a complement to domestic reforms. As
of this writing, this appears to be the case. The incremental
but nonetheless serious economic reforms discussed during
Kim Jong-uns frst year in offce have all but evaporated
while attention has shifted to attracting FDI, particularly in
the wake of the execution of Jang Song-thaek.
The other disadvantage of this approach is that its
socializing effect may be limited. A central dilemma of
the entire engagement approach is that the North Korean
regime exercises direct control over foreign investment and
trade; only indirectly are such ties promoting the process
of marketization. The regime exercises strong control over
the zones as well; indeed, the zones precisely permit such
control, particularly over labor. Payments go not to North
Korean frms and workers, but directly to the government.
Does this particular form of engagement encourage
marketization and openingas it arguably did in South
Korea and Chinaor freeze the status quo in place? The
pursuit of the zone strategy by both South Korea and China
might be seen not as a signal that North Korea is changing,
but rather an admission that it is not.
Finally, there is the question of exactly how much aid and of
what sort to provide. There is no question that humanitarian aid
had positive effects on the welfare of North Korean citizens.
But to date, such aid has been extremely modest and is by
no means large enough to leverage reform of the agricultural
sector that would be needed to improve productivity and
reduce dependence on food aid.
To its credit, the Park administration has shown no interest in a
return to ongoing large-scale food and fertilizer assistance, to
which the North Korean regime responded by simply cutting
commercial imports and diverting resources to other uses.
Large-scale infrastructure investmentsparticularly if
publicly fnancedface the same moral hazard problems.
They will not yield their expected social returns in the
absence of complementary reforms. Rather, they will be
white elephants, as KEDOs light-water reactor proved to
be and the current North-South rail links remain. Moreover,
the scale of these projects will inevitably require private
participation. Particularly in the case of large fxed and
immobile investments such as pipelines and rail, private
actors will be highly reluctant to engage without public
guarantees that could land on the doorstep of the South
Korean government. South Korean participation in the rail
project connecting Rason to Russia may work because of
the ability of Russia to act as an effective guarantor. Purely
bilateral projects run much larger political risks for both the
South Korean government and international investors. It is
not coincidental that few of the Korean chaebol have been
willing to pursue the North Korean market.
These observations about the modality of exchange take us to
the second and closely related problem with the Trustpolitik
approach: that its shape will ultimately depend on choices
made by the North. The North Koreans may well see the
entire Trustpolitik approach as a trap. If it generated an
internal consensus in South Korea on North Korea policy, it
could erode the Norths leverage. At a deeper level still, it is
no doubt diffcult for the North Korean leadership to decide
exactly how much trade and investment it actually wants
from the South and on what terms. Outside of the zonesand
even in themsuch trade could have highly corrosive effects
as North Koreans see the South Korean alternative not via
smuggled DVDs but in large-scale joint projects, the factory
foor and an expansion of NGO contact.
At one end of the spectrum of choice
is a more hands-off, commercial
approach that permits trade and
investment but leaves frms to make
their own economic decisions.
62 - KOREAS ECONOMY 2013
Conclusion: The Likely Way Forward
At present, it appears that the most likely course of
Trustpolitik over the next two years will be precisely the sort
of incremental steps that the initial approach envisioned. One
cluster of initiatives will center on the quid-pro-quos already
outlined: modest humanitarian assistance for family visits.
If these steps make progress, they will raise the diffcult
question of the reopening of the Mt. Kumgang tourist resort,
at which a South Korean tourist was killed by a North Korean
soldier in 2007. Given that the North Koreans have shown
little willingness to provide public assurances with respect to
safetyand have even formally expropriated the property
these negotiations will be diffcult.
The second locus of cooperation will continue to be Kaesong.
In reopening Kaesong, North Korean has agreed to a complex
set of governance arrangements that appear to shift authority
over the zone to a binational commission. However, as the
South learned in 2013, there is little it can do with respect to
a zone that sits on North Korean territory; the new structures
have not been tested. Nonetheless, North Korean willingness
to abide by these new rules, including a dispute settlement
mechanism, could provide the basis for a South Korean effort
to internationalize and even expand the zone. A key question
that will be asked, particularly on the right in South Korea,
is what the Park administration gets in return for efforts that
increase the fow of foreign exchange to the North Korean
regime. This is not an easy question to answer.
The third area of possible cooperation is Rason. After
languishing for years, the zone is on the verge of meeting
at least some of its promise. The Chinese have surfaced the
dirt road linking Hunchun with Rason, reportedly upgraded
the road from Rason to Chongjin and are now investing in
power lines to the zone. The Russians have fnished the frst
phase of refurbishing the rail link; the Park administration
has signaled a willingness to allow the state-owned Korea
Railroad Corporation to participate in this project, although
such participation is by no means assured. There is plenty
left to do at Rason, including dredging the harbor, further
developing it, and investing in power generation. A possible
justifcation for participation in such projects would not only
be South Koreas ability to use the port as a transshipment
sitea material quid pro quobut the fact that North
Korean law appears to give unusual power and discretion
to the Rason City Peoples Committee. Investment in Rason
could support the localization of decision-making and
greater pragmatism, which is currently beyond the scope of
the Kaesong experiment.
Two further predictions are relatively easy to make. There
will clearly be no return to the open-ended assistance of the
Kim Dae-jung-Roh and Moo-hyun eras. Indeed, an interesting
feature of the new Trustpolitik documents is the suggestion
that Seoul would channel more assistance to the North via
multilateral channels that are less politicized, an idea that
deserves support. Second, the uncertain course of North
Korean economic policy and the corresponding risks to both
governments and frms make it highly unlikely that large-
scale investment projects will serve as icebreakers; as KEDO
demonstrated, they are simply too costly to risk. At this point,
the more ambitious elements of the Trustpolitik project, from
the idea of Green Dtente and the building of a peace park
in the DMZ to investment in electricity, transportation and
telecommunication are necessarily in the future. More distant
still is the effective revival of the Roh Moo-hyun idea of a
Northeast Asia Peace and Cooperation Initiative that would
embed North-South relations in a broader multilateral context.
What has not received the attention it deserves is the quite
different approach to North-South engagement suggested by
our review of the history: what might be called Chinese-style
engagement. Rather than seeking out joint public projects, the
Park administration might think more seriously of a private
sector-led strategy. This would require a reversal of the May
24 measures that were instituted following the sinking of the
Cheonan, an admittedly diffcult decision. But it would have
important advantages that more public strategies have lacked.
By backing the government out of the equation, it would
force South Korean frms and the North Korean government
to jointly decide what has to be done to make economic
engagement work.
Stephan Haggard is the Krause Distinguished Professor at the
Graduate School of International Relations and Pacifc Studies,
University of California San Diego. He is the author, with
Marcus Noland, of Famine in North Korea: Markets, Aid and
Reform (2007), Witness to Transformation: Refugee Insights
into North Korea (2011) and the Witness to Transformation
blog at http://www.piie.com/blogs/nk/.
1
Park Geun-hye, A New Kind of Korea: Building Trust Between Seoul and Pyong-
yang, Foreign Affairs (September/October 2011).
2
These exports were nominally fnanced by loans to the North, but needless to say
have never been paid back.
3
KOTRA has a reasonable track record in eliminating obvious discrepancies in the
data, which is based on mirror statistics from North Koreas partners. But it has
underestimated the growth of North Koreas trade with developing countries and
these fgures for fve-party shares may thus be biased upwards.
4
See Stephan Haggard, Jennifer Lee and Marcus Noland, Integration in the absence
of institutions: China-North Korea cross-border exchange, Journal of Asian
Economics, 23, 2 (April 2012): 130145 and Stephan Haggard and Marcus Noland,
The Microeconomics of North-South Korean Cross-border Integration, Interna-
tional Economic Journal 26, 3 (September 2012): 407-430.
KOREAS ECONOMY 2013 - 63
Leading Economic Indicators for Korea
2005 2006 2007 2008 2009 2010 2011 2012
Growth Rate of Real GDP (%)
Annual change at Chained 2005
Constant Prices
4 5.2 5.1 2.3 0.3 6.3 3.7 2
GDP
Current US$ billions
844.7 951.1 1,049.3 930.9 834.4 1,014.7 1,114.7 1,129.2
GNI Per Capita
US$
17,531 19,691 21,632 19,161 17,041 20,562 22,451 22,708
Current Account
US$ billions, BOP basis
18.6 14.1 21.8 3.2 32.8 29.4 26.1 48.1
Consumer Prices (%)
Annual Change at 2010=100
Constant Prices
2.8 2.2 2.5 4.7 2.8 3.0 4.0 2.2
Unemployment Rate (%)
3.7 3.5 3.2 3.2 3.6 3.7 3.4 3.2
Inward Foreign Direct Investment
US$ billions
6.3 3.6 1.8 3.3 2.9 1.1 4.7 4.9
Stock Price Index
Average
1073.6 1352.22 1712.46 1529.49 1429.04 1764.99 1983.42 1930.37
Exchange Rate
Average Won/US$
1,012 930 936 1,260 1,165 1,135 1,152 1,071
Bank of Korea
National Statistical Offce
Ministry of Knowledge Economy
OECD